Think You Know What Constitutes Good Cause?

Let us take a closer look at the facts in this interesting case.

Background Facts

When it was founded several years ago, 180's, Inc. (180's), a city-based sportswear company, was riding very high. Business was good and the benefits the employees received were even better. Then, like many new companies, there were reverses in business, and the company began experiencing severe economic distress. As a way to keep the company solvent, a venture capital group invested in 180's, and assumed significant control of the struggling company. A new CEO was put in place, Susan Shafton, who immediately began cutting expenses and certain employee benefits. As part of the restructuring at 180's, certain key employees were offered retention benefit agreements to ensure that they remained with 180's while it worked its way through these difficult economic times.

Retention agreements, while not very common, are often used when companies are experiencing economic difficulties to keep key employees on board. In this case, certain key employees were promised six months' severance pay provided that they remained with 180's. That severance pay, however, would be lost if the employees were terminated for cause.

Not surprisingly, Ms. Shafton's efforts to cut expenses and lay off employees were not well-received by the remaining employees at 180's. Some of the longer-term employees, including two who had retention benefit agreements, were very vocal about their dissatisfaction with the way the new CEO went about her business. In fact, one of the more senior employees asked Ms. Shafton to step down, which she refused to do. Then, the employees prepared a letter that was very critical of Ms. Shafton's decisions, and threatened to send it to the new investors, with the hope of having her removed. In fact, some of the employees met with representatives of the new investors to express their concern over the direction the company had taken under the leadership of the new CEO.

Four days later, the employees involved in the meeting were terminated. Because the company believed that these employees were engaging in disloyal conduct, it reasonably believed that it had 'cause' to terminate them and, under the retention agreement, any severance pay was forfeited. The company even consulted with its counsel, which concurred that the employees' actions in attempting to undercut the CEO's authority, demoralize the workforce and engage in mutinous conduct constituted cause sufficient to deny the payout of the severance benefits.

Subsequent Lawsuits

Two of the employees who were terminated, Daniel Kinsbourne, VP of Marketing and Development, and Jason Goger, General Manager, filed lawsuits in Baltimore City Circuit Court not over their termination, but over 180's refusal to pay out the severance benefits promised under the retention agreement. At the time, Kinsbourne was making a base salary of $170,000 per year, plus a bonus; Goger was paid $108,000 per year.

Following a multi-day trial, a Maryland jury returned a verdict for the two former employees. Kinsbourne was awarded a total of $230,000, which included his six months' severance, a promised bonus and liquidated damages. Goger received $108,000, which represented his six months' severance and an equal amount in liquidated damages. In reaching this verdict, the jury considered the claims of the two employees, as well as the defense offered by the company. However, as is all too common in litigation, the jury's interpretation of what actually occurred was different from the employer's. While the employer reasonably believed that it had cause sufficient to deny the payout of the severance benefits based on the employees' clearly disloyal, mutinous behavior, the jury, looking at the same facts, reached the opposite conclusion.

In addition to suing 180's for breach of the retention agreement, the two employees also sued the company under the Maryland Wage Payment and Collection Law (MWPCL), which requires that all compensation due an employee be paid within two weeks of their last day of employment. Many other states have similar laws that impose a penalty when wages are not paid when due. Since the severance benefits were considered 'wages' under the MWPCL and the jury found that the employer's failure to pay out the severance benefits was not the result of a bona fide dispute, liquidated damages could be and were awarded, as well as the six months' severance set forth in the retention agreement.

Substantial Fee Petition

Finally, under the MWPCL, where it is established that the employer's failure to pay out the promised wage was the result of a bona fide dispute, in addition to an award of liquidated damages, the employee can also recover any attorneys' fees that were incurred pursuing the claim. Thus, in addition to the $338,000
verdict, 180's can also expect a rather substantial fee petition from the employees' counsel related to the prosecution of the lawsuit. Considering the nature of the case and length of time, that award could easily add an additional $100,000 to $150,000 to the jury verdict, if not more.

It is expected that 180's will appeal this verdict to the Maryland Court of Special Appeals. Thus, until the matter is finally decided by that court, we will not know whether the jury's take on 180's actions will be the final word in this matter.

Bottom Line

This case highlights the risks an employer faces when deciding whether cause exists in certain circumstances. While the employer's determination in this case seemed reasonable in concluding that the two employees engaged in improper conduct, sufficient to constitute cause, the jury, looking at the same facts, disagreed.

At a minimum, employers should be mindful that their opinion or assessment of whether or not good cause exists, may not be the final one, as a jury, and possibly an appellate court, may hold a contrary view. One way to reduce this risk is to include specific language in employment agreements and personnel policies that provides that the employer, in its sole discretion, has the right to decide what constitutes cause sufficient to terminate employment and/or the receipt of certain termination benefits. However, employers should still be mindful that if their decisions are second-guessed by a jury or an appellate court, the result may be dramatically different.

Kevin C. McCormick, a member of this newsletter's Board of Editors, is a partner at Baltimore's Whiteford, Taylor & Preston. He provides advice and counsel to public and private employers, including health care providers, on all phases of the employment relationship.

Most standard employment agreements and personnel policies include provisions that condition the receipt of certain benefits or trigger certain disciplinary actions on the basis of 'good cause' or 'cause.'

For example, an employment agreement may limit termination only in those circumstances in which the employer has cause to do so. Other times, the receipt of certain benefits, such as severance, is limited to those situations in which the employee's departure from the company was for some reason other than 'cause.' Occasionally, examples of what constitutes cause is set forth in the agreement or the policy. More often, however, the agreement does not contain any description, and it is left up to the employer to decide whether cause exists.

Many employers believe that since they make the first call as to whether cause exists, that is the final call. However, as demonstrated by the jury verdict in a recent Maryland trial, it is the jury, not the employer, that gets to make the final call as to whether cause exists. Kinsbourne, et al. v. 180's LLC, Case No. 24C6001910, Circuit Court for Baltimore City, Maryland (2007).

Let us take a closer look at the facts in this interesting case.

Background Facts

When it was founded several years ago, 180's, Inc. (180's), a city-based sportswear company, was riding very high. Business was good and the benefits the employees received were even better. Then, like many new companies, there were reverses in business, and the company began experiencing severe economic distress. As a way to keep the company solvent, a venture capital group invested in 180's, and assumed significant control of the struggling company. A new CEO was put in place, Susan Shafton, who immediately began cutting expenses and certain employee benefits. As part of the restructuring at 180's, certain key employees were offered retention benefit agreements to ensure that they remained with 180's while it worked its way through these difficult economic times.

Retention agreements, while not very common, are often used when companies are experiencing economic difficulties to keep key employees on board. In this case, certain key employees were promised six months' severance pay provided that they remained with 180's. That severance pay, however, would be lost if the employees were terminated for cause.

Not surprisingly, Ms. Shafton's efforts to cut expenses and lay off employees were not well-received by the remaining employees at 180's. Some of the longer-term employees, including two who had retention benefit agreements, were very vocal about their dissatisfaction with the way the new CEO went about her business. In fact, one of the more senior employees asked Ms. Shafton to step down, which she refused to do. Then, the employees prepared a letter that was very critical of Ms. Shafton's decisions, and threatened to send it to the new investors, with the hope of having her removed. In fact, some of the employees met with representatives of the new investors to express their concern over the direction the company had taken under the leadership of the new CEO.

Four days later, the employees involved in the meeting were terminated. Because the company believed that these employees were engaging in disloyal conduct, it reasonably believed that it had 'cause' to terminate them and, under the retention agreement, any severance pay was forfeited. The company even consulted with its counsel, which concurred that the employees' actions in attempting to undercut the CEO's authority, demoralize the workforce and engage in mutinous conduct constituted cause sufficient to deny the payout of the severance benefits.

Subsequent Lawsuits

Two of the employees who were terminated, Daniel Kinsbourne, VP of Marketing and Development, and Jason Goger, General Manager, filed lawsuits in Baltimore City Circuit Court not over their termination, but over 180's refusal to pay out the severance benefits promised under the retention agreement. At the time, Kinsbourne was making a base salary of $170,000 per year, plus a bonus; Goger was paid $108,000 per year.

Following a multi-day trial, a Maryland jury returned a verdict for the two former employees. Kinsbourne was awarded a total of $230,000, which included his six months' severance, a promised bonus and liquidated damages. Goger received $108,000, which represented his six months' severance and an equal amount in liquidated damages. In reaching this verdict, the jury considered the claims of the two employees, as well as the defense offered by the company. However, as is all too common in litigation, the jury's interpretation of what actually occurred was different from the employer's. While the employer reasonably believed that it had cause sufficient to deny the payout of the severance benefits based on the employees' clearly disloyal, mutinous behavior, the jury, looking at the same facts, reached the opposite conclusion.

In addition to suing 180's for breach of the retention agreement, the two employees also sued the company under the Maryland Wage Payment and Collection Law (MWPCL), which requires that all compensation due an employee be paid within two weeks of their last day of employment. Many other states have similar laws that impose a penalty when wages are not paid when due. Since the severance benefits were considered 'wages' under the MWPCL and the jury found that the employer's failure to pay out the severance benefits was not the result of a bona fide dispute, liquidated damages could be and were awarded, as well as the six months' severance set forth in the retention agreement.

Substantial Fee Petition

Finally, under the MWPCL, where it is established that the employer's failure to pay out the promised wage was the result of a bona fide dispute, in addition to an award of liquidated damages, the employee can also recover any attorneys' fees that were incurred pursuing the claim. Thus, in addition to the $338,000
verdict, 180's can also expect a rather substantial fee petition from the employees' counsel related to the prosecution of the lawsuit. Considering the nature of the case and length of time, that award could easily add an additional $100,000 to $150,000 to the jury verdict, if not more.

It is expected that 180's will appeal this verdict to the Maryland Court of Special Appeals. Thus, until the matter is finally decided by that court, we will not know whether the jury's take on 180's actions will be the final word in this matter.

Bottom Line

This case highlights the risks an employer faces when deciding whether cause exists in certain circumstances. While the employer's determination in this case seemed reasonable in concluding that the two employees engaged in improper conduct, sufficient to constitute cause, the jury, looking at the same facts, disagreed.

At a minimum, employers should be mindful that their opinion or assessment of whether or not good cause exists, may not be the final one, as a jury, and possibly an appellate court, may hold a contrary view. One way to reduce this risk is to include specific language in employment agreements and personnel policies that provides that the employer, in its sole discretion, has the right to decide what constitutes cause sufficient to terminate employment and/or the receipt of certain termination benefits. However, employers should still be mindful that if their decisions are second-guessed by a jury or an appellate court, the result may be dramatically different.

Kevin C. McCormick, a member of this newsletter's Board of Editors, is a partner at Baltimore's Whiteford, Taylor & Preston. He provides advice and counsel to public and private employers, including health care providers, on all phases of the employment relationship.